A hedge fund is an investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage, and derivatives. Financial regulators generally restrict hedge fund marketing except to institutional investors, high net worth individuals and others who are considered sufficiently sophisticated.
Hedge funds are regarded as alternative investments. Their ability to make more extensive use of leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, such as mutual funds and ETFs. They are also considered distinct from private-equity funds and other similar closed-end funds, as hedge funds generally invest in relatively liquid assets and are generally open-ended, meaning that they allow investors to invest and withdraw capital periodically based on the fund's net asset value, whereas private-equity funds generally invest in illiquid assets and only return capital after a number of years. However, other than a fund's regulatory status there are no formal or fixed definitions of fund types, and so there are different views of what can constitute a "hedge fund".
Although hedge funds are not subject to many restrictions that apply to regulated funds, regulations were passed in the United States and Europe following the financial crisis of 2007–2008 with the intention of increasing government oversight of hedge funds and eliminating certain regulatory gaps.Although most modern hedge funds are able to employ a wide variety of financial instruments and risk management techniques, they can be very different from each other in respect of their strategies, risks, volatility and expected return profile. It is common for hedge fund investment strategies to aim to achieve a positive return on investment regardless of whether markets are rising or falling ("absolute return"). Although hedge funds can be considered risky investments, the expected returns of some hedge fund strategies are less volatile than those of retail funds with high exposure to stock markets, because of the use of hedging techniques.
A hedge fund typically pays its investment manager a management fee (for example, 2% (annualised) of the net asset value of the fund), and a performance fee (for example, 20% of the increase in the fund's net asset value during a year).Hedge funds have existed for many decades, and have become increasingly popular. They have now grown to be a substantial fraction of the asset management industry, with assets totaling around $3.2 trillion as of 2018. Some hedge fund managers have several billion dollars of assets under management (AUM).